A FICO SCORE is a credit score developed by Fair, Isaac & Co. (now known as Fair Issac Corporation or FICO). Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair Isaac began its pioneering work with credit scoring in the late 1950s, and since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrower’s credit history into a single number. Fair Isaac and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance.
Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
How are scores determined?
The FICO model has five (5) main elements:
- Past payment history (about 35 percent of the score)
The fewer the late payments the better. Recent late payments will have a much greater impact than a very old Bankruptcy with perfect credit since.
Myth: paying off cards with recent late payments will fix things. Payoffs do not affect payment history.
- Credit use (about 30 percent of the score)
Low balances across several cards are better than the same balance concentrated on a few cards used closer to maximums. Too many cards can bring down the score, but closing accounts can often do more harm than good if the entire profile is not considered.
BE CAREFUL WHEN CLOSING ACCOUNTS!
- Length of credit history (15 percent of the score)
The longer accounts have been open the better for the score. Opening new accounts and closing seasoned accounts can bring down a score a great deal.
- Types of credit used (10 percent of the score)
Finance Company accounts score lower than bank or department store accounts.
- Inquiries (10 percent of the score)
Multiple inquiries can be a risk if several cards are applied for or other accounts are close to maxed out. Multiple mortgages or car inquiries within a 14-day period are counted as one inquiry.
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